JPMorgan Chase's excessive tech spending killed IBM outsourcing deal

JPMorgan Chase canned its multi-billion dollar IT outsourcing contract with IBM because the bank was massively overspending on technology, according to an analysis by consultancy Strassmann Inc.

JPMorgan Chase pulled the plug on a seven-year $5 billion contract with IBM in August following its merger with Bank One. Four thousand of the bank's IT employees who had been transferred to IBM under the contract were scheduled to begin moving back to JPMorgan Chase at the beginning of the year.

Explaining the decision, Austin Adams, JPMorgan Chase's CIO, said the merger with Bank One had created a firm with significantly greater capacity to manage its own technology and infrastructure: "We believe managing our own technology infrastructure is best for the long-term growth and success of our company as well as our shareholders."

In an article in Baseline Magazine, Paul Strassman suggests that JPMorgan Chase was keen to take advantage of Bank One's cost-cuting know-how in an effort to bring its spiralling IT spend in line with those if its peers.

He points out that JP Morgan Chase's technology budget grew from $2.18 billion in 1999 to $2.84 billion in 2003, while the budgets of comparable large banks remained steady.

"From 1999 to 2003, the bank's shareholders got a return on their investment of 9.45% a year," says Strassmann. "By comparison, shareholders at Bank of America, Citicorp, Wachovia and Wells Fargo got an average return on investment of 15.79%."

JP Morgan Chase's average compensation per employee was twice that of the other banks. And its spending on technology, per employee, was more than double, at roughly $28,300 a head, compared with $12,700.

Concludes Strassmann: "Only a drastic restructuring in the bank's organisation can reduce that huge disparity. The bank's own excessive spending is what really doomed the IBM outsourcing contract."